Is there no limit to how high Rolls-Royce shares might go?

What goes up should come down, because the outdated saying goes. As an aeronautical engineer, Rolls-Royce (LSE: RR) in all probability is aware of that higher than most. Wanting on the dizzying ascent of Rolls-Royce shares lately, although, it might be lower than apparent. Over 5 years, the FTSE 100 share has soared an unbelievable 695%.

In 2022, Rolls-Royce shares carried out higher than every other firm within the FTSE 100. Final 12 months, it was one of many index’s high performers. Up to now this 12 months, the share value has leapt a 3rd.

Is there any restrict to only how excessive the share can climb – and am I too late to get onboard and make investments now?

The sky’s the restrict

There isn’t a precise restrict to how excessive Rolls-Royce shares may go. In sensible phrases, although, there are a few key components that can possible assist decide the place the share value goes from right here.

One is momentum. When a share is common, it may hold hovering, whereas when it’s unpopular, it may drop time after time. In every case, the motion might not essentially be related to underlying enterprise efficiency.

The opposite issue is that very enterprise efficiency. Over the short- and even medium-term, share value efficiency can grow to be indifferent from how a enterprise is doing. Over the long term, although, enterprise efficiency tends to be essential for the way a share value does.

So, if the enterprise does brilliantly, the sky could possibly be the restrict. Even when it doesn’t do brilliantly, however buyers stay captivated by it, the sky could possibly be the restrict for now. However in the end, the share value will possible fall again to earth based mostly on the basics of the enterprise efficiency.

I reckon Rolls appears overvalued

On the subject of fundamentals, Rolls-Royce has been doing properly.

Not solely is it sticking with its formidable medium-term targets, together with these for this 12 months. It lately mentioned it nonetheless anticipated to ship on its steerage for this 12 months regardless of the potential influence of tariffs which were introduced thus far.

Nevertheless, though the enterprise fundamentals stay sturdy, I believe the valuation is now at a degree that’s arduous to justify purely on these fundamentals. A price-to-earnings ratio of 27 appears too excessive for me, as it might give me little or no if any margin of security if Rolls seems to disappoint.

That would occur. The tariffs might chunk tougher than the corporate expects. Corporations may postpone inserting orders, delaying the popularity of revenues.

There are different dangers too. A weakening financial system may harm passenger demand in civil aviation, probably making airways suppose twice earlier than ordering new planes.

In the meantime, the ever-present danger of an occasion that badly damages demand with out warning – comparable to a pandemic or terrorist incident – hangs over aviation as at all times.

I don’t suppose these dangers are correctly priced into the present value, so is not going to be including any Rolls-Royce shares to my portfolio.